The rise and fall of exports

Exports in Pakistan are abysmally low, down by 18 percent from peak in last three years. In terms of GDP, exports are down to almost half from 12 percent in FY06 to 6.7 percent in FY17.

Some argue that artificial currency peg makes exports uncompetitive while others say lack of incentives, global externalities, energy and security woes etc are responsible. It is not possible to pin down one particular reason as many variables contribute to the slide.

Textile remains key to Pakistan exports, as on average, the sector has contributed 58 percent to overall exports in the past 15 years.

The period from FY03 to FY08 was the best time for exports as it more than doubled from $9.1 billion (textile: $5.8bn) to $19.1 billion (textile:$10.6 bn). The currency was pegged to around Rs60/USD, with depreciation of just 2 percent in six years. Based on FY03-08 data, there are people who opine that exports growth has little to do with currency depreciation; and there are other reasons for fall in exports during FY14-17. They also maintain that currency peg around Rs104/USD is overplayed by opponents.

It sounds naïve as nominal exchange rate is not the right indictor. A glance at real effective exchange rate (REER) portrays an entirely different picture - REER hovered between 94-99 during FY03-08 which implies that the currency was undervalued and probably this was making our exports more competitive. On the flipside, during FY14-17, REER moved up from 104.4 (Jun13) to 126.4 (May17). Rupee’s over valuation has kept on increasing in the last three years, making exports more uncompetitive by the clock.

Surely, the currency overvaluation factor has contributed to the fall in exports. That said, merely adjusting the currency wouldn’t solve the puzzle as there are other factors in the equation.

Recall that the WTO quota was alive till December 2004, while after 9/11 export market access was enhanced to Pakistan. Global growth was strong and Pakistan’s exports market was upbeat till the 2008 crisis.

Exports came down from $19.1 billion to $17.7 billion in FY09, despite a 26 percent fall in currency while REER was at 95.1 to make exports competitive on exchange rates ground. But by that time, recession had hit the world and Pakistan could not really recover because of its own reasons as well.

The energy shortage had adversely affected textile competitiveness and the security situation worsened as well. Despite all these adversaries, exports bounced back in FY11 to reach $24.8 billion (11.6% of GDP).

This implies that some costs are overplayed by critics and exporters to seek rent. There is another important variable at play here i.e. international cotton prices doubled in FY11 to $3.45 per Kg to make cotton based products pricier. Recall that cotton prices had averaged $1.3 per Kg during FY03-08 boom which implies that exports were in real boom during that time. Textile exports increased from $10.2billion in FY10 to $13.8 billion in FY11, simply due to better pricing.

The other factor that worked in favour of Pakistan was that China had artificially kept cotton prices higher which had made Chinese textile exports expensive and that lead to an increase in Pakistan exports. The glory was short lived, cotton prices remained high till FY14 (FY11-FY14 average cotton price: $2.4/Kg) and have moved south since (FY15-17 average: $1.64/kg).

Textile exports came down from $13.7 billion (FY14) to $12.5 billion (FY17) due to low prices, slowdown in China and few other factors. But some support was gained in value added sector due to GSP plus status.

The global factors should have similar affect to other similar exporting economies as well. Let’s run a comparison with India as both Pakistan and India are cotton producing countries and their textile exports remained hinged on local cotton production. Some 15 years back, exports and cotton production of both India and Pakistan were similar. Right before termination of WTO, India invested in modern cotton production techniques, and today Indian cotton production has trebled to 35 million bales, while Pakistan is stuck around 10-12 million bales. This partially explains that Indian textile exports increased from $10 billion in FY01 to $35 billion in FY16.

During FY11-14, cotton production was higher as more farmers grew cotton; but prices went down while sugar cane was incentivized. The sugar cane production has increased by a half since FY10 while cotton shrunk by one fifth. In terms of value addition, sugar industry is upbeat while textile production is stagnated.

The bottom line is that it’s not just exchange rate policy, but overall economic policies that have contributed to this situation. Returns are higher inwards while exports are too competitive for fresh investment. Pakistan can learn from the likes of Bangladesh and Vietnam, which will be covered in this space shortly.